This article first appeared in The Edge Malaysia Weekly on March 4, 2024 - March 10, 2024

PHARMANIAGA Bhd is undertaking a rights issue to raise about RM355 million to improve its financials in order to get out of Practice Note 17 status. The company will also undertake a private placement to raise about RM300 million later.

Many are surprised that Boustead Holdings Bhd, which holds a 47.1% stake in the generic drug maker, has given its undertaking to not only subscribe for its entitlement but also that of its parent Lembaga Tabung Angkatan Tentera’s (LTAT) should the armed forces fund not take up the offer. This came as a surprise because Boustead is also in dire need of recapitalisation.

The undertaking by the group means that the debt-laden conglomerate will remain the majority shareholder of Pharmaniaga.

An LTAT spokesperson says that under Pharmaniaga’s proposed regularisation plan to Bursa Malaysia, LTAT and Boustead have undertaken to subscribe for the rights issue based on their respective portion of shareholding in Pharmaniaga. Boustead has provided a letter of undertaking with its letter dated Feb 19, 2024, he adds.

“Pharmaniaga will procure a letter of undertaking from LTAT for its share prior to the approval of the regularisation plan. In the event that LTAT decides not to subscribe for it, LTAT may assign the unsubscribed portion to Boustead. This approach ensures that Pharmaniaga will be able to raise sufficient funds through the rights issue under the regularisation plan and commitment by its major shareholders, Boustead and LTAT,” he says.

This is in contrast to the original restructuring exercise that was put in place earlier when LTAT was taking Boustead private. The plan then was to take Boustead private and restructure its more than RM10 billion in borrowings by asset divestments. Once the debts have been paid off, Boustead would eventually be wound down.

To do that, under the earlier plan, LTAT would subscribe for Boustead’s rights issue entitlement in Pharmaniaga to dilute its wholly-owned subsidiary’s stake. LTAT would bump up its stake to 28.8% from 7.1%, becoming the largest shareholder, while Boustead’s stake will be reduced to 26.2%.

It was understood that a foreign pharmaceutical firm would later take up a block of shares in Pharmaniaga through the latter’s share placement scheme. Having a reputable pharmaceutical group with a strategic stake would have been helpful in growing Pharmaniaga’s operation. However, that does not seem to be the plan currently. 

Following a cabinet reshuffle on Dec 12 last year, Mohamed Khaled Nordin was appointed to lead the Ministry of Defence, taking over from Datuk Seri Mohamad Hasan.

Khaled, a former menteri besar of Johor, was chairman of Boustead between April 2020 and August 2021.   

Last Tuesday, Khaled told the Dewan Rakyat that he personally did not have any issues with the restructuring plan of LTAT. However, the minister made it clear that specific proposals involving the restructuring of the business model and management of shareholdings, including the sale of assets and disposal of shares in several strategic companies, needed careful consideration.

“We are seeking a win-win situation, where the LTAT strategic plan will not adversely affect the companies, and the shareholdings of LTAT in its subsidiaries can be maintained at a level that allows it to retain control,” Khaled was quoted by the media as saying.

The LTAT spokesperson points out that Boustead has provided the necessary proof of funds. “Boustead is going to finance the entitlement through a combination of internally generated funds and/or borrowings,” he tells The Edge.

Despite its financial stress, Boustead is expected to be able to subscribe for Pharmaniaga’s rights issue simply because LTAT bought its 33% stake in Boustead Plantations Bhd (BPlant) for RM1.15 billion via a privatisation exercise.

Nonetheless, the sale proceeds are meant for debt repayments. As at March 31, 2023, Boustead’s borrowings amounted to RM6.85 billion, including short-term debts of RM3.98 billion.

Boustead is regarded as LTAT’s flagship as the latter’s equity interest in the conglomerate accounted for almost 50% of the armed forces fund’s investment portfolio. Affin Bank is also a major portion of the fund’s portfolio. In short, LTAT’s investments are tied to illiquid assets.

LTAT’s 2021 accounts show that its current liabilities are more than its current assets, which is an indication of poor liquidity. Saddled with underperforming and insufficient liquid investments, the armed forces fund’s flexibility to diversify its portfolio for better returns is limited.

Simply put, LTAT is not on a much better financial footing either. In fact, the government needed to grant it a RM2 billion loan to help fund the privatisation exercise of BPlant.

The armed forces fund came under the spotlight recently after three senior officers resigned, beginning with CEO Datuk Ahmad Nazim Abd Rahman on Jan 31, followed by chairman Tan Sri Raja Mohamed Affandi Raja Mohamed Noor on Feb 8. On Feb 19, LTAT senior strategic director Dayana Rogayah Omar was reported to have also tendered her resignation.

The trio were involved in executing Sustainable 25, which was introduced under former defence minister Mohamad and aimed at reorganising LTAT. The initiative commenced towards the end of 2021 with the objective of changing the asset allocation of its portfolio. 

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